Quite often, I hear from my friends that they have bought savings plan for retirement and/or children education. When I inquired the reason for them to do so, the reply were either have no idea on investment or the insurance company will take care of them when anything happen. For a financial knowledge sound individual, these myths are disaster.
If you say you have no idea on investment, this means you have no idea what you are doing. In this case, how do you know what other people are doing on your money? Yes, insurance will take care of your beneficiaries provided you are covered under the specified incidence stated in the policy. As a matter of fact, majority of life protection insurance policies are providing the same, why savings plan then?
In fact, savings plan is exactly the same as life policy. The only difference is the name itself. I realize that a number of insurance companies like to give some very fancy names to their savings plans. But they are just the same as normal life policy. This is the fact. The function of savings plan is exactly the same as life policy. You pay premium (with “premium”) for protection. Your premium (with “premium”) inclusive all insurance charges as well as commission to insurance agent and only the marginal left over go into the so-called investment. For the investment portion, what insurance company normally does is to secure insured’s investment as much as possible to meet any claim. The investment style, therefore, will be very conservative which in turn generating low return. It is normal if you can get an annual return of three to five percent.
OK, now, you say your savings plan is protecting you. May I know in what sense then? Does it cover your purchasing power? I don’t think so. As I highlighted in my previous post, considering “Inflation Rate”, your personal inflation will be much higher than the national one. So, do you think a five percent return can cover your purchasing power in the future? As for education, inflation rate of normal college fee is in the range of seven to ten percent. Again, the return of your savings plan is out of the picture. By the way, if you are paying premium (with “premium”), your return will be much lesser due to lesser fund go to investment portion after all insurance charges and commission paid.
Savings for retirement and education are important. There are many ways to do it but using insurance is a very bad idea. What can we do then? If an individual does not have any dependant, no insurance is needed. Just save and invest for what is needed in the future. For a married couple with kids, insurance is important. What they need to do is to cover themselves thoroughly through term policy or investment-linked policy. These policies are cheap and invest whatever you can save from premium. As these policies give exactly the same protection as savings or life plan with extremely low premium, why bother the expensive one? Don’t know how to invest? Learn then. Don’t have time for investment? Squeeze it out then. You have the choice but no excuse.
To conclude, my advice is, think twice before consider buying savings plan as you have much better options.